State Bank of Pakistan (SBP) has taken an initiative to stop commercial banks using tactics to befool customers to make extra money, particularly from the consumer financing schemes such as personal loans, house and auto financing.
In this regard, the central bank formulated a Product Disclosure Requirements (PDRs) for banks which bound bankers not only to provide complete details of the consumers financing products but also educate them to take right decision for availing a financing facility.
The central bank stated the objective for this initiative:
The Product Disclosure Requirements (PDRs) are aimed to facilitate consistency in disclosure of essential information on banking products and to promote prudent lending practices among banks/MFBs.
Further, the enhanced disclosure requirements will exert financial discipline and minimize the practices of mis-selling of banking products and related complaints.
The formulated PDRs aimed at addressing information asymmetries between consumers and banks/MFBs.
They will enhance consumers’ understanding of banking products on the positive note. The move will improve standards of transparency in the banking industry; and it will increase and maintain market confidence and trust in the banking industry.
As the banking products and services have become more diverse and complex, it has become increasingly significant for consumers to make their financial decisions properly. Accordingly, consumers should be given relevant, timely, reliable and comparable information regarding banking products in a transparent manner to enable them to make informed decisions on products that best suit their needs.
However, it has been observed that banking customers frequently complain about the issue of overcharging by banks, hidden and additional charges without prior information or consent, misguiding about the products. Resulting customers aver to use banking services for their financial needs mainly for the purpose of automobile and house financing and generate bad word of mouth about banking services to convince others not to use banking services.
Avoid Misleading Advertisements
The central bank is trying to stop misleading advertisements from banks through its PDRs system.
It has been observed that banks in their advertisements provide incorrect and incomplete details to allure customers. A majority of the customers are not even provided complete information by bankers before the signing of the products, hence customers are trapped by bankers trying to make their sales.
SBP directs that:
- Banks/MFBs shall ensure that the advertisement design, presentation and content are clear, correct and not misleading. Advertisement does not contain a false statement which conceals important facts or creates a false impression.
- Advertisement emphasizes the important information in legible fonts (at least size 9) to bring a consumer’s attention to pricing, charges, risk warnings, etc. if made part of the advertisement.
- Bank shall not describe a product as “free” or “no cost” if any fee, by whatever name it is called, or other implied charges are attached with the product.
- Advertisement notifying a consumer of a discount promotion shall specify duration of the promotional period and the terms and conditions which apply to that particular promotion.
Disclosure Must be Ensured Before Selling Products
Prior to entering into contract banks/MFBs are required to highlight to the consumer the key contractual terms and conditions.
- Banks/ MFBs shall inform the prospective consumer of the expected rate of mark-up that will be charged on the financing facility whether it is on fixed, variable or combination of fixed and variable rates. Further, the Annual Percentage Rate (APR) shall also be disclosed.
- They shall clearly disclose amount and term of finance along with number of installments and the amount to be paid for each installment. For the finance on variable markup rate, banks/MFBs shall inform the consumer that the total repayment amount will be based on the benchmark/reference rate (KIBOR, bank rate, etc.) agreed at the time of signing of finance agreement and that it is likely to be changed during the term of the finance.
- Banks shall enlist applicable fees and charges, and their nature, including implied charges/penalties.
The central bank also suggested template of the forms in connection with PDRs that can explain well about the products to customers help them availing banking services easily up to their best understanding and decisions.